US Bank 2013 Annual Report Download - page 127

NOTE 20 Netting Arrangements for Certain Financial Instruments
The majority of the Company’s derivative portfolio consists of
bilateral over-the-counter trades. However, due to legislative
changes effective during 2013, certain interest rate swaps
and credit contracts need to be centrally cleared through
clearinghouses. In addition, a portion of the Company’s
derivative positions are exchange-traded. These are
predominately U.S. Treasury futures or options on
U.S. Treasury futures. Of the Company’s $109.6 billion of
total notional amount of derivative positions at December 31,
2013, $8.3 billion related to those centrally cleared through
clearinghouses and $3.6 billion related to those that were
exchange-traded. Irrespective of how derivatives are traded,
the Company’s derivative contracts include offsetting rights
(referred to as netting arrangements), and depending on
expected volume, credit risk, and counterparty preference,
collateral maintenance may be required. For all derivatives,
fair value is determined daily and, depending on the
collateral maintenance requirements, the Company and a
counterparty may receive or deliver collateral, based upon
the net fair value of all derivative positions between the
Company and the counterparty. Collateral is typically cash,
but securities may be allowed under collateral arrangements
with certain counterparties. Receivables and payables
related to cash collateral are included in other assets and
other liabilities on the Consolidated Balance Sheet, along
with the related derivative asset and liability fair values. Any
securities pledged to counterparties as collateral remain on
the Consolidated Balance Sheet. Securities received from
counterparties as collateral are not recognized on the
Consolidated Balance Sheet, unless the counterparty
defaults. Securities used as collateral can be sold, re-
pledged or otherwise used by the party in possession. No
restrictions exist on the use of cash collateral by either party.
Refer to Note 19 for further discussion of the Company’s
derivatives, including collateral arrangements.
As part of the Company’s treasury and broker-dealer
operations, the Company executes transactions that are
treated as securities sold under agreements to repurchase
or securities purchased under agreements to resell, both of
which are accounted for as collateralized financings.
Securities sold under agreements to repurchase include
repurchase agreements and securities loaned transactions.
Securities purchased under agreements to resell include
reverse repurchase agreements and securities borrowed
transactions. For securities sold under agreements to
repurchase, the Company records a liability for the cash
received, which is included in short-term borrowings on the
Consolidated Balance Sheet. For securities purchased under
agreements to resell, the Company records a receivable for
the cash paid, which is included in other assets on the
Consolidated Balance Sheet.
Securities transferred to counterparties under
repurchase agreements and securities loaned transactions
continue to be recognized on the Consolidated Balance
Sheet, are measured at fair value, and are included in
investment securities or other assets. Securities received
from counterparties under reverse repurchase agreements
and securities borrowed transactions are not recognized on
the Consolidated Balance Sheet unless the counterparty
defaults. Under all transactions, the fair values of the
securities are determined daily, and additional cash is
obtained or refunded to counterparties where appropriate.
The securities transferred under repurchase and reverse
repurchase transactions typically are U.S. Treasury
securities or agency mortgage-backed securities. The
securities loaned or borrowed are typically high-grade
corporate bonds traded by the Company’s broker-dealer.
The securities transferred can be sold, repledged or
otherwise used by the party in possession. No restrictions
exist on the use of cash collateral by either party.
The Company executes its derivative, repurchase/
reverse repurchase and securities loaned/borrowed
transactions under the respective industry standard
agreements. These agreements include master netting
arrangements that allow for multiple contracts executed with
the same counterparty to be viewed as a single
arrangement. This allows for net settlement of a single
amount on a daily basis. In the event of default, the master
netting arrangement provides for close-out netting, which
allows all positions with the defaulting counterparty to be
terminated and net settled with a single payment amount.
The Company has elected to offset the assets and
liabilities under netting arrangements for the balance sheet
presentation of the majority of its derivative counterparties,
excluding centrally cleared derivative contracts due to
current uncertainty about the legal enforceability of netting
arrangements with the clearinghouses. The netting occurs at
the counterparty level, and includes all assets and liabilities
related to the derivative contracts, including those
associated with cash collateral received or delivered. The
Company has not elected to offset the assets and liabilities
under netting arrangements for the balance sheet
presentation of repurchase/reverse repurchase and
securities loaned/borrowed transactions.
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